We often are asked how sales tax applies to 501(c)(3) organization’s fundraising events. CPA Mary Archibald, who specializes in nonprofits, was kind enough to address this question. Read on to glean Mary’s wisdom on this topic.
The sales tax requirements may be misunderstood because most 501(c)(3) organizations do not pay income tax. Therefore, they often take for granted that they are exempt from sales tax. Indeed, when a 501(c)(3) organization puts on a fundraiser, sales tax may be last thing on its mind. However, in many states, including California, there is no exemption from sales tax for 501(c)(3) organizations.
The state-by-state rules are complex, but below are a handful of questions – with answers pertinent to California 501(c)(3)s – to help get you thinking about the sales tax implications of your organization’s events.
- Does sales tax apply to the event ticket?
- If the charge for the ticket is purely for admission, sales tax does not apply.
- If the organization serves refreshments and the ticket does not otherwise state, then sales tax does not apply to the refreshments, such as coffee and tea.
- If the organization contracts with a caterer to serve a meal, the caterer is responsible for paying sales tax based on the amount the caterer charges the organization for the meal.
- If the organization itself serves food or a meal and it is included in the ticket price, than the rules are more complex and a competent tax accountant or attorney should be consulted.
- Does sales tax apply to the price of raffle tickets?
- Tax applies to a ticket charge where the purchaser is guaranteed to win something.
- If the purchaser is not guaranteed to win anything than sales tax does not apply.
- Does sales tax apply to items sold at auction?
Generally it does apply to items sold at auction on the same basis as if the items were sold by a retailer. There is an exemption from sales tax if the organization benefits homeless shelters and certain additional requirements are meet.
Complete rules pertaining to sales tax for fundraising event activities of 501(c)(3) organizations in California can be found in Board of Equalization (BOE) Publication 18. The Multistate Tax Commission and the Association of Fund Raising Distributors and Suppliers have a handy website that links to sales and use tax rules in all 50 states. Look up the rules of your state before your 501(c)(3) holds its next fundraising sales event.
There are geniuses among us in the nonprofit sector. The John D. and Catherine T. MacArthur Foundation recently named five of them as it doled out its much-coveted fellowships, popularly known as “genius grants.”
And the nonprofit geniuses are:
- Mary Bonauto, a lawyer and civil rights project director at Gay & Lesbian Advocates & Defenders, which works to create a just society free of discrimination based on gender identity and expression, HIV status, and sexual orientation.
- John Henneberger, co-director of Texas Low-Income Housing Information Service, which advocates for expanded affordable housing, social and economic justice in housing policies, and federal disaster relief.
- Rick Lowe, an artist and founder of Project Row Houses, which uses art to transform neglected neighborhoods.
- Ai-jen Poo, director of the National Domestic Workers Alliance, a voice for dignity and fairness for millions of domestic workers in the United States.
- Jonathan Rapping, a criminal lawyer and president of Gideon’s Promise, which is working to change the culture of indigent defense through community building and comprehensive, ongoing training and support to create skilled public defenders.
Many of the other MacArthur fellows work in the nonprofit sector, including playwright Samuel D. Hunter (Partial Comfort Productions), historian Pamel O. Long (Princeton, Getty Research Institute, and Folger Shakespeare Library), scientist Mark Hersam (Northwestern University), and researcher Jennifer L. Eberhardt (Standard University), and physicist and brain researcher Danielle Bassett (University of Pennsylvania).
The Foundation selects the MacArthur fellows based on three criteria: “exceptional creativity, promise for important future advances based on a track record of significant accomplishment, and potential for the fellowship to facilitate subsequent creative work.” The winners are selected through a regimented nomination process, the Foundation doesn’t accept applications or unsolicited nominations.
Each winner receives a $625,000 “no-strings-attached” fellowship over five years. They can spend the money as they see fit with no proposals and no reporting.
Want more genius in your day? Check out the other 2014 MacArthur fellows.
After refusing for the last 16 months to speak to Congress about the IRS targeting scandal, Lois Lerner, former head of the IRS Tax-Exempt and Government Entities Division, had a two hour interview with news organization Politico. In the article, Lerner denies wrongdoing and expresses pride in her career, telling Politico she is not sorry for anything she did. She stated: “I’m proud of my career and the job I did for this country.”
As you can imagine, conservatives are not happy. House Oversight and Government Reform Committee Chair Darrell Issa (R-Calif.) said in a statement: “The American people deserve the opportunity to hear Lois Lerner’s testimony under oath. If Lerner had nothing to hid and did nothing wrong in the IRS targeting scandal, she would have chosen to answer basic questions about her conduct instead of obstructing Congress’ investigation.”
The American Center for Law and Justice, which is representing 41 organizations in a federal lawsuit challenging the IRS for improper treatment, believes Lerner’s interview reflects her “arrogance” and call this a “self-serving attempt” to “re-write history.”
Another representative of groups suing the IRS hopes the interview will ignite the House’s effort to enforce its contempt citation.
Is Lerner having her cake and eating it, too, or is she “right” to talk with Politico instead of Representative Issa’s committee?
Late last week the IRS announced that hundreds of streamlined applications for recognition of exemption (Forms 1023-EZ) were rejected. Most were rejected because of the same mistake: the applicant’s name and employer identification number (EIN) on the form did not match IRS records. This mismatch results in automatic rejection of an application. In order to use Form 1023-EZ, an applicant must meet all eligibility requirements, including use of its proper name and EIN.
Fortunately all is not lost for an applicant whose 1023-EZ is rejected. Rejection does not mean denial of exemption. Even though an applicant’s streamlined application is rejected, it may apply again using the standard exemption application, Form 1023. On a side note, the IRS has noted that it had received more than 7,000 Forms 1023-EZ since they became available July 1 of this year. This amounts to almost 45% of all exemption applications received.
Have you filed a Form 1023-EZ? Share your experience with your readers.
Would you donate money through a “buy” button on Twitter? The social-media platform recently announced that it is starting to test the waters. The aim is to create a Twitter-based “convenient and easy, hopefully even fun” shopping experience.
Seven nonprofits are among the “buy” button guinea pigs. The nonprofits are 9/11 Day of Service, The Nature Conservancy, Global Citizen, Glide, GLAAD, DonorsChoose.org, and Product Red. Each was selected based on its existing relationship with the social-media platform and because of its already strong Twitter following.
Only a small percentage of users in the U.S. will initially see charitable solicitations in their feeds. (Twitter promises that the number of users will grow over time.) For example, DonorsChoose.org will be selling back-to-school t-shirts to support their charitable purpose of supporting classrooms.
Would you make a charitable donation on Twitter? Share with us a screenshot of your Twitter feed if a “buy” button shows up.
The Prostate Cancer Foundation, which funds prostate cancer research globally, recently returned donations totaling $8,000. The donations were raised in connection with a post that was set up on Reddit to disseminate and view hacked nude celebrity photos. Viewers were called to donate to the Foundation to atone for having viewed the photos.
In a statement, the Foundation said: “We would never condone raising funds for cancer research in this manner. Out of respect for everyone involved and in keeping with our own standards, we are returning all donations that resulted from this post.”
The “Subreddit” page where the fundraising took place has now been banned, but a Reddit user responded sarcastically to the rejected donations: “Guys, we’re literally worse than cancer.”
This $8,000 donation may have been easier to reject than the donations of millions of dollars from the Koch brothers colleges and universities thought about rejecting just a few months ago.
Is your organization ready to make tough decisions about accepting donations? Has the board adopted a gift acceptance policy or reviewed its existing policy recently? When it’s time to make tough decisions, a gift acceptance policy will help your board decide. It will also give the board a scapegoat on which to blame rejecting a donation.
Democrats and Republicans on a Senate investigative panel reviewing the so-called tea party scandal agree that the IRS used improper methods to scrutinize the exemption applications of social welfare organizations. But the agreement stops there.
The Democrat-led Permanent Subcommittee on Investigations found that there was “no evidence of IRS political bias” in the agency’s actions. In the Subcommittee’s report, a focal point was that the IRS targeted more than just conservative groups. The Subcommittee made clear that it is not happy with the audit released last year by the Treasury Inspector General for Tax Administration (“TIGTA”) that only cited IRS buzzwords that garnered targeting related to right-leaning groups such as “Tea Party” and “Patriot.” The Subcommittee’s report stated that left-leaning groups were also targeted by the IRS, with buzzwords such as “Progressive” and “Occupy.”
The minority staff dissenting view in the Senate report maintains that the TIGTA report was “accurate and proper.” It notes that 83% of the targeted groups were right-leaning. The Subcommittees’ ranking minority member Senator John McCain (R-Ariz.) argued: “The majority’s interpretation of the evidence fails to capture the extent of the IRS’s bias against conservative groups and flagrant abuse of power.” Unknown is the ratio of 501(c)(4) applications for right and left leaning groups.
Inspector General Russell George, head of TIGTA, said last Friday that TIGTA is reviewing the Senate report and that their audit is ongoing.
Tell us if your organization was targeted by the IRS. If so, what buzzwords do you think the IRS used to target it?
According to the Canada Revenue Agency (CRA), the answer is No. CRA recently told Oxfam Canada that its mission to prevent poverty was too broad in that it could benefit people who are not already poor. The review was part of a standard filing to renew Oxfam Canada’s nonprofit status as required under a Canadian law passed in 2011.
CRA warned Oxfam Canada that “relieving poverty is charitable, but preventing it is not.” Oxfam Canada conceded and changed “prevent” to “alleviate” in its mission. But the organization’s executive director called it an “absurd conversation” and promised that their programs and activities have not changed despite the revised mission statement.
A representative of CRA maintained that charitable activities still include teaching money management, budgeting, and other life skills that could lead to the prevention of poverty.
One of Canada’s leading newspapers, The Globe and Mail, reports that the debate reflects the deteriorating relationship between the government and some parts of Canada’s charitable sector due to certain groups’ criticism of the government’s programs and policies, especially on the environment. The list of critics includes Oxfam Canada, Amnesty International Canada, and Canada Without Poverty.
A corporation’s Articles of Incorporation effectively limit the activity the organization may undertake. In particular, it may not conduct any activity that can’t be described by the corporation’s statement of purpose in its Articles. In addition, substantially all of an exempt organization’s activity and expenditures must be in furtherance of the purpose it provided to the IRS in its exemption application. Deviation from this purpose – even if the new activity would clearly qualify as tax exempt – can result in loss of exemption as well as other penalties (including penalties payable by board members).
Do your organization’s programs and activities fall within the purposes it set forth in its Articles of Incorporation and exemption application?
Most people would rather buy a lottery ticket than put money in a savings account. But Doorways to Dream, a nonprofit organization that aims to create savings innovations for lower-income individuals, is helping people essentially do both with its Save to Win program. The program offers prize-linked savings accounts. This means that every certificate of deposit of $25 or more purchased with a participating credit union “buys” a ticket for a prizewinning raffle. The program aims to make saving fun. It has the feel of gambling, but no risk.
The program has created 50,000 accounts with savings totaling $94 million. The program is open to anyone, but the organization describes most of its depositors as “financially vulnerable.”
These accounts have garnered the support of both liberals and conservatives. The accounts incentivize savings and promote good habits, while also emphasizing personal responsibility and reflect a private market approach to dealing with poverty. Many states are modifying their banking laws to allow credit unions to offer prize-linked savings accounts and Congress is reviewing bills to modify federal banking laws to offer these accounts.
Other nonprofits have started similar programs. Propel Schools, which operates charter schools in Pittsburgh, started a program called Fund My Future, which started a college savings accounts for each student. Every $10 deposit into an account earns an entry for the monthly lottery, which offers prizes such as gift cards to local restaurants and supermarkets. The Times reported that “[i]n the program’s first year, about 15% of the students deposited a total of $25,000.”
Don’t try this at home. Nonprofits must carefully consider applicable laws before venturing into this type of arrangement. Each state has different laws regarding lotteries and a nonprofit must be careful to follow them.
Has your organization tried an incentive program to encourage participation?
As the U.S. Open got started this week, The New York Times was more interested in conflicts off the court than on it. An examination of the United States Tennis Association (U.S.T.A.), the 501(c)(6) national governing body for the sport of tennis, revealed that several of the organization’s current and recent board members have benefitted from the organization’s grants and contracts.
Ray Benton, a U.S.T.A. board member, is the CEO of a junior tennis center that received more than $840,000 from the U.S.T.A.’s charitable wings over the last three years. John Korff sat on a U.S.T.A. board that approved a $50,000 grant to a health club chain that his company bought only months later. Katrina Adams, currently first vice president of the U.S.T.A. board, is the Executive Director of a junior tennis program in Harlem that received more than $215,000 from the U.S.T.A. and its charitable operations while she was on the U.S.T.A. board. And Jeff Williams, also a U.S.T.A. board member, is longtime publisher of Tennis Media Company, which receives about $2.8 million from the U.S.T.A. for member magazine subscriptions.
A spokesman for U.S.T.A. explained that getting individuals involved in elite tennis on the board would be impossible without some conflict of interest. “You’d be kind of hard pressed to find someone with that kind of tennis expertise that might not have interacted with the U.S.T.A. at some point,” he said.
The Times calculated that at least $3.1 million of the U.S.T.A.’s $200 million budget that includes salaries, grants, vendor contracts, and other payments goes to organizations with ties to board members.
Given the apparent benefit some board members receive from the U.S.T.A., do you think it deserves to retain its “nonprofit” status?